By Rick Waechter, Founder

As I write this, we are navigating through our second consecutive weekend of unusually harsh winter weather, with risk of power outages and hazardous driving conditions. Watching people prepare for the storms has caused me to reflect on how not to prepare for the next bad stock market.

Like most people (this is the confession part of the blog), I made an unnecessary trip to the supermarket before the storms. What I saw was completely expected, and ridiculous. Empty shelves, from milk and bread to produce. A friend described going into the produce section of his supermarket and reporting to his wife afterwards that they would be having beet salad that night. With no disrespect to the handful of readers who like beets, it’s crazy when the only thing left in the produce section is beets.

The exaggerated, fear-driven response to a rare winter storm reminds me of flawed actions people too often take when they are worried about a market collapse.
 

Common mistakes investors make during market stress

These include:

• Abandoning your financial plan. Let’s imagine you decided you should own 2/3 of your investments in stock (higher risk / higher expected long-term return) and 1/3 in safer investment types (bonds / cash), which you expect, on average, will have a lower return. Imagine also you have a carefully thought-out tax plan, to minimize unnecessary capital gain. Perhaps you are planning a Roth conversion, or focused on minimizing your Medicare premiums, or conscious of an unavoidable capital gain coming (e.g., selling a second home). In creating your financial plan or your tax plan, you and your financial planner thought through what could happen. You knew the market could fall at some stage. That’s why your portfolio is not 100% stock. So why would you change course just because you hear a drum beat of bad news, discarding all the planning you did?
• Selling something (often stock) and creating a large tax bill even when you will likely re-buy “after the crisis passes”. Not only does this create an unnecessary tax bill. It assumes you will know when to buy back into the market. That’s unlikely.
• Buying something which you think will do well in a crisis even though there is no evidence it will. Think gold. Yes, the price of gold has gone up massively, as it has in other times of stress. But that doesn’t mean it won’t fall, and it doesn’t mean it is a “safe” investment. To wit: in the last investment gold rush, the price peaked in 2011, subsequently fell by 50%+, and did not get back to the 2011 peak for 10 years.

The good news for someone who can keep their emotions in check: you don’t have to eat beet salad. There’s surely something in your cupboard which will last you until the storm has passed. (My friend in the beet salad story was kidding; he had plenty of food at home.)  If you want to make a quick trip to the supermarket to gawk at panicky shoppers and be thankful that you planned for the storm, go right ahead. But don’t join the frenzy.